As I write this we are a week out from the first Official Cash Rate review of 2022. Most commentators at this stage are predicting a 0.25% increase at the February 23 review, taking it to 1%. How high it goes from there becomes interesting although inflation remains the largest concern. At present ANZ economists believe the OCR could top out at 3%, which would push one-year interest rates up significantly higher than they are now. There are seven reviews across 2022 and at this stage there is an expectation we are likely to see the Reserve Bank raise the cash rate at each review.

Many borrowers have ended up on the right side of rates by rolling one-year terms over in the last few years, which has proven to be a successful borrowing strategy as rates trended lower.

Right now, however, there may be more benefit in fixing for a longer period of time. One point I noticed in an article is that there is an expectation if Russia proceeds to invade Ukraine this could add as much as 2% to inflation in developed nations. On top of this the US labour market has shown job growth at a much higher level than expected, with more than one million more people in work than had been predicted.

Labour Market

These international issues come on top of local supply chain restrictions and other factors such as the very tight domestic labour market, which will continue to keep inflation high.

Rises in incomes and rents will offset some of the pain borrowers will feel with the rate increases although some investors will be getting nervous about the phasing in of interest deductibility rules over the next few years.

First home buyers in particular are having a hard time of it with the tightening last year of the amount of lending banks can make to borrowers with less than a 20% deposit.

With the overly onerous Credit Contracts and Consumer Finance Act (CCCFA) amendments making it even harder to borrow, things are not going to get easier as interest rate increases make it inevitable lending test rates banks use will get tougher. As these move up a borrower’s lending capacity naturally reduces. Over time this will push more borrowers to use non-bank funders, although as can be seen by comparing Resimac on the attached chart to other lenders on this page, it will be at a slightly higher interest rate.